Republicans rap state AGs on mortgage talks

Banks, state attorneys general squabbling over foreclosure fines

By

RonaldD. Orol

WASHINGTON (MarketWatch) — Republican members of Congress on Thursday lashed out at state attorneys general investigating big-bank mortgage servicers, arguing they’re trying to achieve in a sweeping settlement what Democrats were unable to accomplish in Congress.

“The settlement proposal requires the resuscitation of policies and programs that have not worked or that Congress has explicitly rejected,” said Rep. Randy Neugebauer, (R., Texas) at a hearing on mortgage problems at big banks.

At issue are discussions between state attorneys general and the Justice Department and large bank servicers to settle an investigation into problems uncovered in foreclosure practices at large financial institutions.

Fines in the billions of dollars are likely still on the way as part of the deal, with some participating in the discussions seeking to have a portion of the fines be used to cut amounts owed by some borrowers facing foreclosure.

Republican lawmakers on the House Financial Services Committee took issue with that, insisting that principal write-down creates an incentive for homeowners to default and seek a reduction.

Sean Duffy, (R., Wis.) raised concerns with principal writedown as part of the settlement talks in light of Congress’s rejection of Democrat-backed legislation known as “cramdown” that would have enabled bankruptcy courts to lower the principal amounts owed by borrowers so homeowners could avoid foreclosure. The legislation also would have allowed judges to reset mortgage terms, extend repayment periods and reduce interest rates and fees.

Loan servicers, often owned by the biggest U.S. banks, collect a fee for administrating all aspects of a loan, including sending monthly payments to mortgage investors, maintaining records and collecting and paying taxes and insurance.

The top four U.S. mortgage servicers are Bank of America, Wells Fargo, J.P. Morgan Chase, and Citigroup Inc. (NYSE:C) , according to Inside Mortgage Finance. These four companies are also top securitizers of mortgage loans.

No settlement deal by Wednesday

Despite media reports, settlement negotiations won’t be completed by Wednesday, according to Geoff Greenwood, a spokesman for Iowa Attorney General Tom Miller. Miller is leading the negotiations.

Wednesday also is the deadline set by the Office of the Comptroller of the Currency for a group of big banks to file plans required as part of an April package of sanctions. The banks were sanctioned for “negligence” in residential mortgage loan servicing and foreclosure processes.

Big fines still likely are on the way. New York Attorney General Eric Schneiderman said June 28 that states and banks are in talks about imposing a $20 billion to $25 billion fine on the financial institutions, according to the Democrat and Chronicle. A group of the biggest U.S. banks reportedly proposed paying $5 billion to settle an investigation of foreclosure practices conducted by federal and state authorities.

Included in the settlement discussions are efforts to create a broader set of mortgage-servicer standards to help borrowers. Julie Williams, chief counsel at the OCC, indicated that the DOJ and states could reach a deal on settlement standards that could coincide with the July 13 deadline for big banks to submit plans to bank regulators.

“It was understood that the timing for submission of the detailed action plans required under our orders had the potential to coordinate with — and could encourage — resolution of issues in areas where the scope of our orders overlapped with matters in the settlement discussions being led by DOJ,” Williams said.

At the hearing, Alabama Attorney General Luther Strange, a Republican, said he believed mandating principal reduction is “bad public policy.”

“Requiring lenders to reduce mortgage balances would remove incentives for banks to lend money and for investors to purchase mortgages, denying people access to the credit they need to purchase a home,” Strange said.

Greenwood said that documents circulated in May established a framework for a monetary relief fund that is divided into categories, including funds going to the states, funds that are national in scope, and capital set aside for restitution to victims harmed by bank misconduct.

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